Financing and Resolving Banking Groups

We study how banks’ resolution regimes affect investment. Banking groups create financing synergies by transferring excess financing capacity across units and lowering bankers’ agency rents from monitoring. Single-point-of entry (SPOE) resolution preserves groups’ structure, which permits ex post efficient reinvestment in weaker units hit by negative shocks, but can prevent optimal investment ex ante. Multiple-point-of-entry (MPOE) resolution separately resolves weaker units following negative shocks and prevents reinvestment, but can foster ex ante investment. We characterize the conditions under which SPOE or MPOE resolution is efficient as a function of banking groups’ risk profile and overall profitability. The coexistence of both resolution regimes is more efficient than the adoption of a uniform resolution regime.